How A Law That Could Have Been Amazing For Startups Got Killed In Washington

In a rare act of bipartisanship, the White House and Congress
were able to pass the JOBS
act, which they think will spur job growth.

The act lets small companies take on up to 1,000 investors
(double what was allowed before).

It increases the allowable number of shareholders in community
banks.

And it lets companies advertise to potential shareholders.

But the JOBS Act could have been awesome for
start-ups.

But that part of the bill was obliterated by
lobbyists that represented the interests of already-wealthy angel
investors and the banks.

In its original form it lifted most restrictions on buying shares
of a company–all the legal hoops that the SEC puts in between capital and good ideas.
Like the requirement that new companies find angel investors with
over $1,000,000 dollars in assets (excluding their house), or go
through a major funding institution. The JOBS act was so start-up
friendly it was even being called the Kickstarter bill.

But there's also a regulatory barrier keeping startups and small
investors apart: Under current law, only "accredited investors"
-- people with more than $1 million in assets (excluding home
value) or $300,000 in income -- are allowed to buy shares of
companies sold outside the SEC's burdensome regulatory structure.
These are known as "angel investors."

These SEC regulations have some perverse effects. Online
auctioneer eBay, for instance, cannot allow you to sell
"any portion of an ongoing business." But as I write, a
small-businessman in North Carolina is legally selling -- on eBay
-- his gas station and convenience store for $1.2 million or best
offer. So you don't need SEC approval to sell 100 percent of a
business, but you're a felon if you try selling a 99 percent
stake, or 1 percent, without jumping through Uncle Sam's hoops.

So the House approved a bill that was very friendly to
crowd-funding. Almost all of these restrictions were amended with
the hope of creating new jobs and spurring innovation.

But it got hammered in the Senate. Jeff Merkley of Oregon
and Scott Brown of Massachusetts inserted an
amendment to the bill that banned crowdfunding not done through
intermediary platforms–managed by the SEC. That satisfied
everyone who run other "intermediary" institutions in the
market. Fidelity is Scott Brown's biggest
donor.

The Merkley amendment also capped even this crowdfunding at
$1,000,000 - which satisfies the interests of the already
approved "Angel investors."

In fact, that was exactly the restriction favored by
Catherine Mott, chairwoman of the Board of Directors
for the Angel Capital Association, who wrote an advisory letter
about the legislation before it passed.

Correction: An earlier version fo this article said that the
amendment capped crowdfunding at $500,000